Your Spouse Dies Before the Required Beginning Date

If your spouse dies before his/her Required Beginning Date (RBD), you basically have three options (two for ROTH IRAs) to choose from in deciding how to handle the Inherited IRA. You may use the Traditional IRA Required Death Distribution or the ROTH IRA Required Death Distribution election form to choose any of the options below.

Option 1 – Treat the Account as Your Own

In most cases, this will be the option you’ll want to choose. If you are younger than 70½, you will be able to delay having to take any Required Minimum Distributions (RMDs), until you reach 70½. If you are over age 70½, your RMDs will be smaller because, by treating the account as your own; you’ll be able to calculate them using the Joint Life table, as opposed to the Single Life table required to be used by beneficiaries.

Option 2 – Leave the Account in your Spouse’s Name

While this option in not generally the most tax-efficient option, there are situations where it does make sense to leave the account in the deceased spouse’s name, at least for a certain period of time. One thing to keep in mind however, that by choosing this option, your spouse’s contingent beneficiaries will usually receive any death benefit should you die.

This option usually results in a larger annual RMD because you will be required to calculate using the Single Life table, as opposed to the Joint Life table allowed for accountholders.

As mentioned, there are a few situations where it makes sense to choose Option 2 for a while, then choose Option 1. For instance, if you are older than age 70½ when your spouse who was younger than 70½ dies. In this case, it may make sense to leave the account in your spouses name until the year in which your spouse would have turned 70½ (this is when RMDs are required to begin). At that point, you would make the election to treat the account as your own and begin taking the RMDs using your age and factor from the Joint Life table.

Another scenario where it makes sense to leave the account in the deceased spouse’s name is when you are younger than 59½ when your spouse dies and, you wish to receive some or all of the proceeds from the IRA. If you were to treat the account as your own at that age, any withdrawals that you take would be subject to an early withdrawal penalty of 10%. This can be avoided by leaving the account in your spouse’s name, at least until you attain age 59½.

Option 3 – Follow the Five Year Rule (Not available for ROTH IRAs)

If your intent is to fully drain the account in a short amount of time after your spouse’s death, this option may be the best choice. However, once you miss one of the RMDs required under Option 1 or Option 2 above, there is no going back. With this option you give up the benefit of extending the preferential tax treatment of deferring income taxation on the account growth.

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